Dave blogged last month about SEC Chair Gary Gensler publicly committing to protect investors from fraud in the crypto space – a signal that he would be open to the SEC playing a greater regulatory role in the world of digital assets. Last week, the CLO of Coinbase – the largest US crypto exchange – blogged that the company had received a Wells notice from the Staff about its crypto lending program. Coinbase’s CEO also took to Twitter about the exchange.
As we explain in our “SEC Enforcement” Handbook, a Wells notice is a statement by the Enforcement Division that they’ve reached a preliminary conclusion to recommend an enforcement action – but a majority of Commissioners still have to approve to institute the proceeding. Absent an extension, the Staff has 180 days after sending the Wells notice to decide whether to recommend enforcement to the Commissioners.
Some companies don’t disclose their receipt of a Wells notice, they wait until there’s an enforcement action. So it’s interesting here that Coinbase made the whole thing public right away. In a predictable argument that the regulatory crowd would say is against their own interests, crypto fans seem to be siding with the company in wanting the SEC to step away.
The company seems startled by the notice because it had been “proactively engaging with the SEC” about this product, which would allow Coinbase to lend out USD Coin (a stablecoin) from deposited funds in exchange for interest, a portion of which is paid to the depositors. Now, the SEC is saying it will bring an enforcement action if Coinbase offers the product without registration.
The Staff is taking the position that Coinbase’s “Lend” product may be a security that cannot be offered without registration or an exemption. Anne Lipton’s blog explains how the common law has developed to a point where the SEC is performing the test under both Howey and Reeves – and this blog from Adam Levitin analyzes how those tests apply to Lend. In short, he concludes that Lend fits one or both of the tests that define whether something is a “security.” Former SEC Enforcement Staffer John Reed Stark also took that stance in a popular LinkedIn post.
Yet, there could be a path out. Matt Levine pointed out that Section 3(a)(2) of the Securities Act – and the four-part Reeves test – could allow Lend to avoid regulation as a security. The catch is that Coinbase would then be subject to banking regulations, which it probably doesn’t want.
– Liz Dunshee